by T. GormanPosted on Posted in SECActions

The SEC is facing another dilemma in Judge Rakoff’s courtroom in the Southern District of New York. The question this time does not involve SEC v. Bank of America, discussed here, which is on its way to trial. This dilemma involves its recently filed insider trading case against Galleon Group and Raj Rajaratnam. This time, the U.S. attorney’s office is involved along with its two insider trading cases against Mr. Rajaratnam and others, discussed here. Judge Rakoff, it seems, thinks the SEC filed its case to litigate. He has ordered the Commission to be ready for trial in five months.

The SEC probably has less interest in taking Galleon to trial in five months than it has in trying Bank of America. Typically, the Commission expects the U.S. Attorney’s Office to seek intervention in the civil enforcement action and request a stay in deference to the criminal case. The SEC does not object in this all very typical scenario. If done here, after all, the agency will have joined with the U.S. Attorney’s Office, filed a lengthy complaint accusing the defendants of insider trading, participated in a press conference and issued a press release, yet will not have to proceed to a trial until after the criminal matter is tried.

The government’s motion for a stay of a parallel SEC case is typically granted. Yet, permitting both actions to move forward has good and bad points for both sides. To be sure, if both cases go forward, the SEC defendants will use the broader civil discovery provisions to unveil part of the government’s criminal case. That may eventually aid them when the criminal case goes to trial.

There are however, disadvantages for the defendants. In the criminal case, they can invoke the Fifth Amendment and not testify. The defendants can also elect to watch the government put on its case before making a decision on whether to testify. In contrast, if there is civil discovery the SEC may take the deposition of the defendants, forcing them to make a decision on whether to testify before seeing the evidence in the criminal case. If the defendants may elect to invoke their Fifth Amendment rights, the SEC can seek an adverse inference which is not available in the criminal case. That inference can help the Commission establish liability in the civil case. Thus, parallel criminal and civil cases present opportunities and pitfalls for both sides.

All of this however, neglects the critical question at stake here which is fundamental fairness in law enforcement. The USAO and the SEC can choose when to bring their respective cases. If they do not want those cases to proceed simultaneously, they can elect to file them in sequence, one going forward to completion followed by the filing and litigation of the other. In most cases there is no reason for the USAO and the SEC to file their cases together and then move to stay the SEC case.

It is fundamentally unfair for a law enforcement agency to file a case which accuses a citizen of wrong doing, trumpet its claims in press conferences and a press release and then move to stay. This tactic silences the defendant, denying him or her the right to contest and refute the claims and charges. As the court stated in U.S. v. Reyes, No. 06-0556 (N.D. Cal. Oct 4, 2006) when denying a government request for a stay, it “appears to me that when the SEC decides they want to charge people with violations of the law . . . they invite . . . the defense to respond . . . I don’t really appreciate the fundamental fairness [of a stay] . . .”

If either the USAO or the SEC has no intention of litigating the charges brought in their respective complaints, then the actions should not be filed. Cases are filed in court to resolve claims, not make allegations which cannot be refuted while serving as vehicles for holding press conferences and issuing press releases. Law enforcement should be about enforcing the law and protecting the rights of citizens – all citizens including the accused – not headlines.

by T. GormanPosted on Posted in SECActions

The SEC continued its war on insider trading, filing another settled enforcement action. SEC v. Spaugy, Civil Action No. 09-CV-687 (N.D. Okla. Filed Oct. 23, 2009). Defendant Don Spaugy was the Vice President of Financial Services for SemGroup, LP.

Between late May and July 15, 2008, SemGroup suffered a severe liquidity crisis as Mr. Spaugy well knew. The company received large margin calls from its commodity and future market positions as the price of crude oil moved against them. During this period Mr. Spaugy received 111 margin calls from six future commission merchants. In one five-week period, the calls totaled over $570 million. During this same period trading partners began to reduce their credit and trade lines with the company. By July 9, 2008 the company received an e-mail from its commercial bank stating that its account was overdrawn by over $4.1 million.

As the liquidity crisis continued, the company arranged to transfer its NYMEX portfolio to an international bank. The fee for this transaction was $143 million. The meeting was arranged by Mr. Spaugy.

On July 14, Mr. Spaugy called his broker and asked when his units in the limited partnership would be eligible for long term capital gains treatment. Although that would not occur until July 18, 2008, Mr. Spaugy sold over half of his holdings the next day. He sold his remaining holdings on July 16. The following day the company announced that it was experiencing a liquidity crisis and was exploring options including Chapter 11. Its share price dropped significantly.

To resolve the case, Mr. Spaugy consented to the entry of a permanent injunction prohibiting future violations of Section 10(b) and Rule 10b-5 thereunder. He also agreed to disgorge the over $67,0000 he avoided in losses plus prejudgment interest and to pay a civil penalty equal to the amount of the disgorgement and prejudgment interest. See also Litig. Rel 21260 (Oct. 23, 2009).